Leveraging the hidden benefits of IFRS 16:

The real questions CFOs should be asking their finance team.

By Alexandra Cain

The transition to the AASB 16 / NZ IFRS 16 accounting standard, which was published in 2016 and came into force in January 2019, has been one of the most widely-anticipated shifts in accounting and finance. Now that most reporting entities have been through one full compliance cycle, it’s an opportune time to assess how all stakeholders are responding to the new standard.

This was the focus of the most recent CFO Magazine Lunchtime Live WebCast, which explored the wider implications for IFRS 16 and featured an esteemed panel including PwC Partner, Sean Rugers, Yuen-Yee Cho, Partner at King & Woods Mallesons and David Byrne, Managing Director APAC for LeaseAccelerator. As moderator James Solomons, Group CFO, Xref, noted at the start of the session, “CFOs realise this standard runs much deeper than the finance dept, requiring many more interactions between the finance department and different parts of the business.”

Sean Rugers, Partner, PwC Australia, drew on the findings of a global survey, which included participants from Australia and New Zealand, and the professional services firm’s own analysis of listed companies’ filings for the first year of adoption, when making his opening comments.

“The standard’s objective is to provide a better way to capture companies’ obligations in relation to lease arrangements. It is also designed to increase comparability between companies in the way they report leases,” Rugers explained.

“The first objective has been achieved, with our observations indicating lease commitment disclosure has increased by about 20 per cent globally. Certainly, putting leases on the balance sheet has prompted companies to undertake a closer assessment of their lease commitments,” he added.

But Rugers noted there is still a long way to go before comparability between the way companies report leases improves. “There are at least five different ways companies have described the transition from IAS 17 to IFRS 16, which immediately creates challenges in explaining the impact of the standard to non-financial people.”

He noted IFRS 16 is mainly affecting the way asset and liabilities and also earnings are reported. He anticipates there will be ongoing diversity in the way leases are reported for the next few years before more consistency is achieved. This in turn is creating differences in the way companies report outcomes in investor reports.

“We have found there are several variations in how companies do this. About a third are restating numbers in terms of prior comparative periods, so stakeholders can assess financials like-for-like on a post IFRS 16 basis. A bigger group, about 40 per cent, are backing out the changes for the current year to get to a pre- IFRS 16 basis, again so they can compare like-for-like. And about 25 per cent are doing a combination of both. What this indicates to us is that finance teams are having a tough time educating non-financial teams to understand the changes, which means it will be some time before we get to get a level playing field in the way companies report IFRS 16.”

David Byrne is the Managing Director – APAC of LeaseAccelerator, a lease life cycle platform that automates lease management. He noted there are a number of key variables that drive the complexity of this standard.

“One is organisational structure. If the business operates across multiple countries, divisions and states and there is a dispersal of assets, this adds complexity to the way leases are accounted. Timeliness of feedback and communication about any changes to assets becomes more difficult. If there is any change to an asset, finance needs to be told about that change in a timely manner,” said Byrne.

“It can be difficult to get everyone interested in an asset, which is where automation comes in, making it easy for non-accounting asset owners to comply” he said.

Byrne reminded the audience that, “not all leases are created equally. While there may only be one change to a three-year car lease during the term, other assets have more complexity during their lifecycle – and COVID has produced even more complexity, with less complex assets such as motor vehicles with some not hitting their mileage milestones due to the changing operating environment. Managing all this manually is very difficult. So being able to automate data collection around leases helps to address this complexity and deliver the business better data as a whole to manage its leases and its assets.”

While many finance departments are producing financial statements using both the old IAS 17 standard as well as the new IFRS 16 standard, Rugers expects this to normalise over time. “Many companies will get tired of presenting two sets of numbers and there will be a natural desire to streamline their accounting,” he noted.

Part of the challenge however, is the fact very few external stakeholders so far have shifted to using the new IFRS standard in their analysis of companies. “If you take credit rating agencies, banks and investor groups, only ratings agencies have changed their approach to consider the new requirements. Until other stakeholder groups shift to IFRS 16, there is no burning platform for companies to educate them. Inevitably, they will have to shift to IFRS 16, but we see that being over a one to five year time frame.”

Another panellist, Yuen-Yee Cho, Partner, Banking and Finance, King & Wood Mallesons, agreed with this. “Other stakeholders have been resistant to change given the potentially far-reaching consequences of moving to a post-IFRS 16 world e.g. on financial covenants, debt facility pricing and how companies are assessed in the market. Corporate clients are also still grappling with this change and they don’t want to be penalised for changing too quickly.”

Byrne argued companies will start to appreciate the value of the new standard over time. “There are many benefits beyond compliance. The biggest benefits are end of term management; getting the best price for both assets and finance and also being able to make better decisions about whether to buy or lease an asset such as land.”

Rugers agreed one of the main benefits of the new standard is access to better data, especially for equipment leases. “This poses questions about what do with all this data. It allows CFOs to make better lease decisions, it may change their view on cap ex verses op ex budget allocation and can change incentives for the management team. Having done all the hard work in shifting to the new standard to meet compliance obligations, there are now more opportunities to take advantage of the data that is now available and make decisions that are in the best interest of the company.”

It’s likely it will take some time for IFRS 16 to be fully embraced not just by companies but by all the internal and external stakeholders that use the information companies disclose as a result of this new standard. What’s key is that IFRS 16 has changed all parties’ mindsets about accounting for leases and an education process is still underway. Nevertheless, there are plenty of opportunities to automate the way data around this is collected and use it for the benefit of the business now and into the future.

CFO Lunchtime Live was proudly sponsored by LeaseAccelerator

LeaseAccelerator provides a global lease lifecycle automation platform that improves free cash flow and ensures long-term compliance across equipment and real estate assets. Thousands of users rely on our Software as a Service (SaaS) platform to manage and automate 700,000 leases valued at $200 billion across 5 million assets in 172 countries.

The LeaseAccelerator platform includes integrated asset-level accounting, reporting, governance and stakeholder performance management, along with a competitive leasing marketplace fueled by a unique global lessor network of more than 500 bidders. Using this strategic financial platform, customers gain business insights about decentralised assets and stakeholders from centrally managed, rich lease data. On average, customers save 7% on lease financing in our lease marketplace and 10% on lease costs through better end-of-term management. Customers can leverage expert training or choose to outsource the leasing process using one of our trusted managed service providers.

For more information please visit: https://explore.leaseaccelerator.com/